Expectational Stability in Multivariate Models

Seonghoon Cho and Antonio Moreno ()

No 06/08, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This paper shows that the concept of Expectational stability (E-stability) in a multivariate framework is inherently model-dependent. Whereas a Rational Expectations equilibrium (REE) is subject to model-specific parameter restrictions from the economic model at hand, a perceived law of motion (PLM) is postulated without such restrictions because economic agents are not likely to know the restrictions a priori. Therefore, an unrestricted PLM is in general overparameterized relative to an REE of interest in multivariate models even when the functional form is the same as the REE. Since E-stability necessarily involves model-specific extents of overparameterization, it is model-dependent in general. An immediate implication is that E-stability in a multivariate framework is not directly comparable across models and, in particular, across different representations of a given model. This implies that one may draw different conclusions on E-stability of an REE to one model under alternative representations of the model and the REE. We discuss a potential direction to develop a model-independent concept of E-stability.

Keywords: E-stability; Rational Expectations Equilibrium; Overparameterization; Multivariate model (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008-10-06
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